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Edited Transcript of KGH.WA earnings conference call or presentation 17-Mar-17 11:00am GMT

Thomson Reuters StreetEvents

Full Year 2016 KGHM Polska Miedz SA Earnings Presentation

Warsaw Mar 17, 2017 (Thomson StreetEvents) -- Edited Transcript of KGHM Polska Miedz SA earnings conference call or presentation Friday, March 17, 2017 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Krzysztof Skora

KGHM Polska Miedz SA - CEO, Chairman of Management Board

* Stefan Swiatkowski

KGHM Polska Miedz SA - Vice Chairman of the Management Board, Finance

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Conference Call Participants

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* Rafal Wiatr

Citi - Analyst

* Pawel Puchalski

BZ WBK Brokerage - Analyst

* Mattei Markovich

Bloomberg News - Media

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Presentation

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Unidentified Company Representative [1]

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Good afternoon, ladies and gentlemen. Let me welcome you at the meeting where we are going to present our final results for 2016. We are going to start the presentation swiftly. We will have 30-minute presentation and then questions and answers.

Now let me turn the floor to the CEO.

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Krzysztof Skora, KGHM Polska Miedz SA - CEO, Chairman of Management Board [2]

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Ladies and gentlemen, I have the pleasure and honor to summarize the results of KGHM Polish Copper SA Group for 2016.

2016 was a tough year for KGHM Group. The macro environment was not conducive to our business since the prices of strategic commodities were low compared to the previous periods. In addition to that, we faced some operational challenges during the past 12 months, and there were some important events that I should highlight.

We worked on the update of the strategy for the period 2017-2020. This update was needed due to the new macroeconomic environment that we need to face so the strategic goals that we set in 2015 had to be readjusted; and the new strategy will be presented by the end of April this year once we have all the internal corporate approvals to do so.

In terms of the key operational events, well, we started up the flash furnace at the Glogow I Copper Smelter and this is the largest investment, the largest CapEx that we completed during the past few years. It was successful. And at this point in time, we are slowly but steadily reaching full nominal capacity. Last year, it was 75% of targeted capacity and we are moving upwards, which is an excellent performance, given that the startup was recently.

We also had new exploration works, 36 kilometers of mine tunnels excavated in the Deep Glogow area which is the most promising area for KGHM. At this point in time, the production is 5% of our total domestic extraction.

We paid PLN300 million in dividend for 2015. We are a dividend-paying company and we want to make sure that all our shareholders are able to maximize their benefits of their shareholding in our Company. We paid over PLN1.3 billion in mineral extraction tax for 2016.

In terms of financial performance, the situation is stable on a year-to-year basis. However, the revenue was down. The net result, without adjustment for impairment testing, was pretty much the same, PLN1,225 million.

We also announced the impairment write-off which was PLN5.3 billion, and that was dedicated to the part of our international assets. International assets continue to be one of the greatest challenges for our Group.

To summarize our production and sales and financial results, well, payable copper production was down by 6% on a year-to-year basis, and that was due to the standstill of the copper smelter Glogow I in Q3, and that was also due to the startup of the new flash furnace in Q4 last year.

The payable copper sales were up by 1% with the total of 702,000 tonnes. We were able to achieve that as a result of utilizing our own reserves and inventory and copper concentrate.

Consolidated sales were down, and they were PLN19,156 million with a stable EBITDA, PLN4,666 million, which is as a matter of fact in line with our result for 2015. However, the revenue was down by PLN1 billion due to the low prices. This shows that we are a stable company. From year to year we have stable performance. We keep cost discipline and we very much count on the improved efficiency and productivity of our international assets.

So now, Stefan, would you please cover the next section?

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Stefan Swiatkowski, KGHM Polska Miedz SA - Vice Chairman of the Management Board, Finance [3]

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Hello, everyone. I'm going to discuss the macroeconomic environment which is probably well familiar to you, but I want to show it from our perspective.

The three main metals in 2016 showed very different behaviors in 2016. Copper is definitely the key metal for us, and until the end of Q3 2016, it was not able to bounce back in price. The average annual drop in price was 12% in dollars, and depreciated zloty against the dollar helped us because in zloty terms, the average drop was 7%.

So copper was definitely lagging compared to silver that was bouncing back much earlier. And you can tell on this curve that there was some convergence between these curves in Q4 2016.

The third metal was particularly important for Sierra Gorda and it's only counted in dollars because we don't have it in PLN since earlier it was basically going very much down. It was not able to go down much further. The bottom was there. So altogether, it dropped by 3%.

Well, we had a very hot political environment in 2016. Probably politics prevailed over economy and I think that since the outset of my business career I have never remembered any year when anyone would claim that the situation is certain. In 2016, we didn't have that much economic commotion but there was a lot of political commotion, and hence, a great deal of uncertainty.

Speaking of the global economic outlook, surprisingly it is good. First of all, the metal or commodity market was back in favor, and this is due to the perception of the situation in China. I'm saying perception because no one can take it for granted what is happening there, but the perception is better, and once Donald Trump was elected as the president, his investment projects helped the overall perception of commodities. But to that we need to add the advancing ratios that show that the economic outlook is quite good.

And here we refer to the commodity prices and commodity prices are holding quite well as of today. So the combination of the high price of copper in dollars and the strong dollar and weak zloty, this combination is very beneficial to us. Therefore, in zloty terms, the price of copper is very good, I would say almost excellent, although the dollar price has not reached the record high level. Over to the CEO.

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Krzysztof Skora, KGHM Polska Miedz SA - CEO, Chairman of Management Board [4]

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Thank you. Let us move to more data from production.

We have managed to maintain stable production of copper throughout the Group despite our challenges around the launch of our new flash furnace.

Production of equivalent copper was 742,000 tonnes, which means there was a fall of 1% compared to last year. This fall of 1% is due to smaller amount of production in Poland. This production was slightly complemented by better results in Sierra Gorda performance.

All the concentrates and surpluses of concentrates that were due to the shutdown and the launch of the new furnace were sold, 35,000 tonnes. And the fall in copper production was partially compensated by a higher share of silver and gold, mostly because these metals had better prices.

When it comes to our international business, there are some declines, mostly due to lower production in Robinson, lower yields in Robinson; around 3,000 tonnes less, 6% compared to 2015. And this was all due to a lower level of ore processing, but we compensated for it by better qualitative parameters of the ore itself.

When it comes to Sierra Gorda in 2016, we had higher performance, higher yields than in 2015. But let's remember that in 2015, we started, more or less mid year analyzing the entire project because this is when we started our production in our commercial activity.

We have also grown in terms of production and yield of molybdenum. Molybdenum, it used to our greatest weakness, but right now we have seen some improvement and we're hoping that 2017, especially when it comes to molybdenum, we were hoping to see significantly better results.

In terms of other metals, compared to 2015, production was higher by 12% mostly owing to higher processing of important concentrates. These products had higher gold content. And, of course, we did yield payable gold in Morrison in Canada.

When it comes to unit costs, at the level of the entire capital Group, these fell by 11%, which is, of course, due to the fact that C1 costs were lower by 11% because of the other accompanying metals. But in comparable macroeconomic conditions, this would be lower by 3%. And when we're talking about the Polish business, this cost slightly increased, again comparing the same parameters year to year based on the same ForEx and commodity prices.

We have improved C1 costs in our international operations. Especially, Robinson allowed us to increase our performance and we reduced costs significantly and this resulted in a fall of C1. In Sierra Gorda, the decrease in C1, it's the greatest.

But these two periods are not exactly comparable because we only started our mining in Sierra Gorda so 2016 is the only full production year that we operated there. But again, comparing same to the same, C1 in Sierra Gorda fell to below $2 per pound.

So let us talk about the operating results. Production, operations, it all of course does translate into our financial performance.

When it comes to our EBITDA, the Group's EBITDA, it fell, but only slightly. However, we did observe quite a large drop at the level of KGHM SA, their main company, and it was due to lower sales volumes due to a shutdown of one smelter. And, of course, low copper prices were persisting at a certain point.

But it was compensated by a much higher EBITDA from KGHM International. We have also mentioned some cost-reduction activities. There was quite a robust program implemented to reduce costs. Headquarters were involved, but also individual mines were involved and there was a series of projects.

And projects were not rushed through. We were applying for permits, and on most of our projects there was not a lot of intense, let's say, activity.

But anyway, we had some EBITDA improvement in the international aspect. Sierra Gorda also improved. In 2015 there was launch. 2016 it was still very early days, of course, for Sierra Gorda, but still it did work as a mine at least.

So here you see EBITDA on those graphs, 55%. And on the right-hand side at the bottom, you see 100% what it would like in dollars. EBITDA overall fell by 1%, which is a small drop.

But when you look at this graph on the left-hand side at the bottom of the slide, we were greatly boosted by the fourth quarter where prices hiked.

When it comes to our financial results, our consolidated result is mostly encumbered by write-offs. There will be a separate slide about that. Before write-offs, in parallel, let's say, or comparable conditions, the results, the net result, would not have changed. But the main reason that the financial result is different is write-offs.

When it comes to net debt, most -- throughout most of 2016 it kept us up at night. We tried what we could to make sure that our net debt to EBITDA should be kept below 2 times. The fourth quarter, of course, helped us greatly to go below that level. And the increase of debt, we have our debt in dollars, so definitely the weaker zloty became, the higher the net debt became at the same time. So from PLN700 million, over PLN500 million is attributed to increase in ForEx.

Actually, in real terms, we were in better shape throughout most of 2016, and you'll be able to see that on the following slide. Cash generated from operating activities, they covered 96% of non-operating expenses, and this slide speaks volumes. You have this in your conference packs so you'll be able to peruse it later.

Our investment outlays, over PLN600 million [is a] program to build a new smelter, and the -- we had some capital. And also, there were some issues around the Robinson mine.

So here, take a look at the main groups where impairment tests were conducted, Victoria and Morrison. In all those four areas, some write-offs and some impairment tests were conducted. In Sierra Gorda, that's the largest amount due to some loans extended to Sierra Gorda. It doesn't mean that those loans have been somehow extinguished. Sierra Gorda has the obligation to pay its loans.

And now we are moving towards the summary where we want to identify the key goals for 2017. First of all, we have to update the strategy of the Group so where it's line with the macroeconomic environment and of the capabilities of our Group; and our management capabilities when it comes to the very complex international assets.

Another assumption that we take for 2017 is to hold copper in concentrate production at more or less the same level as last year, which is 425,000 tonnes, which in practical terms means that it would be up by 0.2%, so a slight increase in production of copper in concentrate.

Now silver in concentrate; here we believe that there would be a slight decline. We will get down to 1,221 tonnes.

Now looking at the sales volumes, we presume that payable copper will be 536,000 tonnes, which is less than in 2016 when we were able to sold (sic) 560,000 tonnes. The sales volume of copper and silver is lower in 2017, where in 2016, it's down by 4% for copper and 10% down for silver. And this is geared to the fact that we need to pass on to our clients 15,000 cathodes and 47,000 tonnes of silver that were produced on the third-party -- based on third-party inputs, hence lower sales with the stable production capacity.

C1 costs are estimated at $1.37 per pound. CapEx is approximately PLN2 million, which is way down compared to the last year, 20% down, and this is mainly due to the completion of the pyrometallurgy project completed with the startup of the flash furnace in Glogow; but equity investments will go up and they will be beyond PLN1 billion, and this is mainly due to our capital exposure on international markets, specifically Sierra Gorda.

We intend to keep the liquidity of the Company at the net debt to adjusted EBITDA ratio below 2 times, so it seems that this multiplied, this seems to be safe and we should be able to keep the Company liquid and stable in financial terms.

Well, we were able to save some time on the presentation, but now I would like to turn the floor to you. We are open for your questions. The Management Board will take any questions you may have. We would welcome questions related to our performance for 2016.

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Questions and Answers

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Rafal Wiatr, Citi - Analyst [1]

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Rafal Wiatr, Citi. I would like to ask you for one explanation.

In your report, I think it was the consolidated report, I think that the page 130, or 133, or 136, there is a report that includes Q4 and you identified write-offs. And it's [4.7/4.8] in that report, and the date of it you published not on the report but in the press communication, it's [5.7] for Q4, the value of total write-offs.

If you don't have the immediate response to my question, I would be happy to follow up, but to be quite honest, to me this is not really clear where this difference comes from.

And my question is also about CapEx. Shall we presume that the $3 billion that you have for the [miedz] company, is it the same number that we should expect at the consolidated report, or it would be much higher because $1 billion is just capital injection for KGHM International? Whether this is equity or whether this is a loan it doesn't matter, but is it more or less $3 billion, or in consolidated version we will have a higher number?

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Unidentified Company Representative [2]

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Well, to be -- in terms of your first question, it's hard for me to answer the top of my head. I would rather look it up in the report.

So please follow up on the first question, on the -- as far as the second question is concerned, it should be the same when it comes to the consolidated report; so the same number as standalone.

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Unidentified Audience Member [3]

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mBank Brokerage House. I have two questions.

First, the cash costs of copper production, in 2017 you show where it's going to be up compared to 2016 despite the fact that this is in dollars. And today, zloty is much weaker to -- depreciated against the US dollar. So is it your conservative projection of the copper production costs, or do you believe that there is such a high pressure on the costs, on production costs?

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Unidentified Company Representative [4]

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Well, the production costs are slightly up for two reasons. First, the wages are up; and effectively, it's up 2.8% compared to last year, which is slightly lower than what we have in the budget.

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Unidentified Audience Member [5]

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And what else was there in terms of costs, cost drivers?

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Unidentified Company Representative [6]

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Well, basically, we presume that costs will be under control. We do not anticipate a major increase in costs and in terms of real cash expenses.

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Unidentified Audience Member [7]

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JPMorgan. Two questions about CapEx.

$1 billion of capital expenditure includes your CapEx dedicated to the improvement of the production profile in Sierra Gorda. Have you already decided what will be the strategic profile of this project? Because we see that the total CapEx was actually reduced so you're not going to actually go ahead with phase II.

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Unidentified Audience Member [8]

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So when we look at this $2 billion-plus dollars, this is the total CapEx for this project, so I'm just trying to figure out how much is dedicated to the debottlenecking that we were discussing earlier.

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Unidentified Company Representative [9]

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It is true that phase II was put on hold because of the new sort of operating reality of this project. Please bear it in mind that Sierra Gorda project started production in 2015 effectively. Therefore, it was quite natural that after 18 months or two years we come to the point where we evaluate the project and we check whether the plan was in line with reality. And given the current reality, phase II is not sound financially.

We developed various scenarios to improve operational effectiveness, and that scenario that you mentioned is one of those that is considered. However, it is not approved yet. We need to verify our assumptions for that. But we definitely need to improve our operating processes in Sierra Gorda. But I am speaking about operating processes. I'm not speaking about the new substantial capital expenditure. Therefore, currently, we are focused on improving the recovery of molybdenum. So this is the critical aspect.

Overall, copper production is roughly in line with the assumptions that we had, although our assumption was that we will reach targeted production volume with our standard scenario without increasing CapEx.

Now the level of recovery of copper is not our main headache. The main headache is molybdenum and recovery rates for molybdenum. So this is something that we may actually improve with our standard practice followed to improve optimization processes. We have technology deployed that needs to be improved. It was in a sense an experiment our technology, so there is certainly a lot of room for improvement here.

Now in terms of the CapEx for Sierra Gorda, this is first of all the project finance debt payment. We need to pay that back. And this is the major part of our CapEx dedicated to this project. So the pure CapEx, CapEx as such, is at the level which guarantees that we should be able to improve our operational characteristics, but nothing more.

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Unidentified Audience Member [10]

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So this PLN1 billion actually takes into account this improved recovery of molybdenum. So this CapEx amount actually includes this particular item?

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Unidentified Company Representative [11]

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Yes, because we speak about operations here, and operations certainly require some CapEx, but it would be rather done with understand that operating activity is not within the framework of the new project.

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Unidentified Audience Member [12]

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And now speaking of the copper volumes, you mentioned why it's going to be down. I understand that your own production will be the same except that you will have less copper salt from third-party ore?

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Unidentified Company Representative [13]

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Yes. We have stable production but we are going to decrease our sales. So we have similar level of production but we are going to have a lower sales volume. And the reason is that we have to pass on to our clients the production that was handled as third-party concentrate processing, so it was a service provided to the clients. In the case of the third-party concentrate, all we have is the smelting margin and nothing else.

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Unidentified Audience Member [14]

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Well, thank you.

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Unidentified Company Representative [15]

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Investor Brokerage. So let's continue with Sierra Gorda.

You have mentioned all the costs, dollar costs, C1 costs, and how they -- what they were in different quarters. But what about the difference between the first half versus the second half? We can see the difference of [2.1]. So I'm wondering about C1 in Sierra Gorda and how things could be in the future given what happened with better productivity, better efficiency, especially when it comes to molybdenum.

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Unidentified Company Representative [16]

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Well, yes, indeed. We are looking to have some productivity improvements. That will be mostly related to higher yields so we want to reach the nominal values. Right now, it's 120,000 tonnes, right? So we're trying to reach that. We're so below this level. And, well, when we reach this nominal value then, of course, what will happen is that unit costs will go down.

But also, let's remember that just like I said before, we need to improve operational parameters for yields in molybdenum, and that's the second way that we can try and lower unit costs. When it comes to copper, yields are under control. When it comes to molybdenum, we're below our initial assumptions that were used in the financial model. We are below this parameter still, the one that we initially took into our models.

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Unidentified Audience Member [17]

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So what improvements can we expect in 2017 given the CapEx, given all the --? No. Let's talk about improvements, not CapEx. Yes, efficiency or productivity improvements, percentage-wise.

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Unidentified Company Representative [18]

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Well, the economics of this project indicates that if molybdenum price levels should be stable, 65% of yield will allow us to reach break even operationally. Let's also remember that it is important for this yield to be stable over time, over a longer period of time, especially that such projects that are not very mature yet, they tend to be volatile. So the basic objective is to get to stability, to get stable yields, at the level that's higher than the 65% break-even threshold.

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Unidentified Audience Member [19]

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What about the write-off in 2016? There was something in 2015 as well for the Chile part. So I'm wondering about funding and banks that are funding that. So are there any covenants that might be exceeded due to the structure of assets, an impairment of assets? Are you going to --?

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Unidentified Company Representative [20]

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You're talking about covenants, like national?

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Unidentified Audience Member [21]

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No. I'm talking about the international, so the funding of Sierra Gorda in Chile.

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Unidentified Company Representative [22]

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Well, funding of Sierra Gorda is happening through our Japanese partners, so our Japanese partners are, let's say, party to this. We of course do have to pay project finance, but it has nothing to do with covenants.

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Unidentified Audience Member [23]

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So the ball is on their court; I mean the Japanese partners?

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Unidentified Company Representative [24]

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Yes. Well, we're paying duly towards project finance; we're not defaulting. So right now, the burden, let's say, is with the Japanese.

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Unidentified Audience Member [25]

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Right. So what about this 2017? There is a unit cost. That's going to be like $1.37 per pound, right? That's the assumed rate. So maybe this 10% -- because if you do the calculations it comes out 10% year on year -- if you're looking at increased C1 in the parent company, volumes are supposed to be stable. Dollar is not much different from what used to be -- what it used to be in 2016. So this growth that you're assuming, can your assumption still change?

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Unidentified Company Representative [26]

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You talk about the growth of C1?

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Unidentified Audience Member [27]

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Yes. $1.37 per pound; and there is a growth year on year of more or less 10% of this unit cost.

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Unidentified Company Representative [28]

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Well, it's just the exchange rate for dollar. We're not assuming that the dollar will be on our side as much, so it's due to one of these.

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Unidentified Audience Member [29]

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And what about your dollar rate? What is it? What are you now? $1.37 per pound. It's --

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Unidentified Company Representative [30]

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Well, we're not creating any very detailed macroeconomic assumptions. Well, our budgetary assumptions that are behind, or that are determining the final values, are our internal assumptions, assumptions that we've really discussed pretty thoroughly. But actually, our macroeconomic environment has changed so it allows us a little bit more optimist. So we are moderately conservative in our assumptions. But anyway, all is based on our, let's say, internal predictions and our internal thinking that happened as we were developing the budget.

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Pawel Puchalski, BZ WBK Brokerage - Analyst [31]

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Pawel Puchalski, BZ WBK Bank. I have one question.

I'm reading about Sierra Gorda; Sierra Gorda 2016, how you were optimizing projects. I see PLN1 billion in expenses outside of Poland, other than in Poland. So are you expecting that the Sierra Gorda oxide project that it could launch in 2017?

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Unidentified Company Representative [32]

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Well, the Sierra Gorda oxide project is being analyzed and looked at purely from economic point of view, and it does seem it might have some value, quite a lot of value. Final decisions haven't been reached yet.

When it comes to expenses, they are really, really very insignificant. There is no formal official decision to operationalize this project, not yet.

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Mattei Markovich, Bloomberg News - Media [33]

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[Mattei Markovich], Bloomberg News. My question is about Sierra Gorda.

I'm understanding that you are assuming there would be a -- or there will be a growth despite the write-offs. So when you're -- when it comes to processing, when it comes to yield, you're expecting a change up. Or are you still calculating this and you're trying to take into account bottlenecking -- debottlenecking?

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Unidentified Company Representative [34]

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Well, debottlenecking, sure, it can improve productivity, definitely. And we are of course trying to get all the parameters, all the indicators up: production, yield, everything; and we want to of course improve every single stage of the production process. These are, let's say, standard practices if you operationalize a project.

But the parameters of the deposits themselves, of the resources themselves, are not the best, let's say, because when you compare this to our competition, for example, the content of copper, there is -- in our deposits it's a little bit lower so we have to improve our operating processes, operational processes. That's obvious.

And what we're doing right now is we are, of course, improving monitoring processes, governance processes; also, human resources governance. Definitely, governance in Sierra Gorda is that there is the owners' council institution that supervises or oversees the management of the Company, and this is what's happening. And our level of involvement, our level of detail is definitely higher. We're more involved and we're asking more questions and we're sending people out there to help.

And we are pretty satisfied with the results that we've achieved over the last month because both EBITDA in Sierra Gorda as well as yield parameters have gone up, which means it's a step in the right direction. And as a result, it will lead to a positive cash flow generated on the project.

It's a tough project, as you know very well; and, of course, a way forward is to improve processes rather than something revolutionary. So debottlenecking is not a breakthrough or anything like that. It's simply a scenario or a way to eliminate bottlenecks. But it's not going to happen through a lot of CapEx. It's going to happen through painstakingly improving processes.

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Mattei Markovich, Bloomberg News - Media [35]

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So what time -- what is the timeline? When are you expecting to see a positive operating result and positive cash flows?

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Unidentified Company Representative [36]

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(inaudible) Well, we do have models and we do have our calculations that allow us, let's say, to be more or less optimistic internally, but it's not something that we feel comfortable with sharing with, let's say, greater public.

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Mattei Markovich, Bloomberg News - Media [37]

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I have one more question. Do you see a possible scenario for dividend payment?

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Unidentified Company Representative [38]

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You mean on Sierra Gorda?

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Mattei Markovich, Bloomberg News - Media [39]

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No. The Company, the Group; the standard procedure regarding the dividend payment.

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Unidentified Company Representative [40]

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KGHM has been a dividend-paying company for the past few years, and as I said at the beginning, we want to make sure that all our shareholders are able to maximize their benefits related to their shareholding in our Company. And if the macroeconomic environment and the financial situation of the Company allow that, we would like to retain the status of a dividend-paying company.

Certainly, the macroeconomic environment that we have today makes us more optimistic about the prospective payment of the dividend. However, we are going to have a discussion about it, and very soon we are going to present our recommendations regarding the dividend.

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Unidentified Audience Member [41]

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(inaudible) [Pol Business Daily]. I would like to ask for a short explanation. Namely, what do you mean when you say that your engagement and scrutiny is much greater? Does it have anything to do with the HR turnover in Chile last year and so many managers leaving the Company?

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Unidentified Company Representative [42]

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But what do you mean saying about a high turnover?

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Unidentified Audience Member [43]

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Well, because there were five CEOs in that company?

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Unidentified Company Representative [44]

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In Sierra Gorda?

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Unidentified Audience Member [45]

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No, sorry. It's not Sierra Gorda. It's international that had five CEOs.

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Unidentified Company Representative [46]

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Well, KGHM International and Sierra Gorda are two different corporate governance cases so I wouldn't mix one with another]. So what did you have in mind?

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Unidentified Audience Member [47]

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Well, what I meant was that the entire Management Board of KGHM is very much focused on international assets.

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Unidentified Company Representative [48]

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Myself, I am very much engaged in the evaluation of the current situation. We are reviewing all the data and we are having discussions about the best possible operational scenario for this particular project.

I am personally present at that project. I visited the site twice. I'm going to travel there for the third time. We have a CEO who is responsible strictly for international assets, and his personal priority is to improve operational parameters of Sierra Gorda, but also at the mid level management when we have engineers and our miners who actually go there to support operating processes. And we were very successful with the progress in the processing area. This is measurable. We can see a much better performance.

We also have a new VP Finance for this project. He's Polish. And hopefully, he will be able to make a meaningful contribution to this Company. Therefore, the level of attention that this project is getting from the Management Board of the whole Group is very high, and definitely as a result, we may expect a better performance of this project.

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Rafal Wiatr, Citi - Analyst [49]

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[Rafal Wiatr] again, if I may.

I understand that you have inherited certain things when you took the position of the CEO of the Company so I don't want to be overly inquisitive about Sierra Gorda. But nevertheless, there is one thing that is still eating me up. It's not quite clear to me and I think that it's not clear to my colleagues either, namely what is the actual problem of Sierra Gorda? Because you said that in terms of the deposits there are some problems. So is it like the content of the deposit, or is it still a transit issue that you were discussing earlier? So what prevents you from reaching the targeted efficiency?

This is the first question.

Second question. During the last two quarters we saw fairly high costs, and in the tests published recently, Sierra Gorda showed $1.66 or $1.7 per pound , and that's how you were doing the valuation of the project. Do you believe that you are able to reach that next year, and if you're not going to reach that target next year, are you going to have additional impairment write-offs?

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Unidentified Company Representative [50]

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Well, answering your first question, namely what is the real problem of Sierra Gorda, well, from our point of view, KGHM, this is the very first time when we have to manage such a highly complex project. Certainly, some mistakes were made when the deposit was evaluated, or when the overall investment was evaluated. Well, the underlying assumptions that fed the model which identified the profitability of this project were not accurate, and that backfires at the project.

It's not only about our operating capacity. It's not our operating capacity that has direct impact on the profitability, but to a large extent, we are dependent on the prices of the copper and the molybdenum. So the assumptions that were prepared for molybdenum production did not materialize themselves and, therefore, the cash flow did not materialize itself.

The development of such a highly complex CapEx was a big challenge given that this is an open-pit project and we have different expertise when it comes to mining operations.

In addition to that, we have a Japanese partner. We have to co-manage this project. And we had to go through the learning curve how to work together with our joint-venture partner on such a complex project. Prior to that, we were always managing our projects independently.

I believe that over the past few months our partnership is better. I think that together with the partner we have the same vision of the problems, the same perception of the problems, and we see the same reality. So this is a major step forward.

But given the corporate culture, I think that this project was not something that we were really prepared for. We had some time. We had to go through the learning curve. We had to make some personnel changes to make sure that we are able to manage the relationship with the partner so that we are on the same side when it comes to goals and targets but we see the challenges in the same way as our Japanese partners see them.

I believe that this is happening as we speak, that our relationship has been more positive recently, and that helps our performance on this project.

Since the underlying assumptions have not materialized themselves, there is a range of consequences. There were some obvious operations errors that occurred with this project. As a result, financial performance is way off and much worse than anticipated.

Overall, we have faith in Sierra Gorda. That's why we are going to stay on. We are not going to quit this project. Myself, I am moderately optimistic when I look at the financial projection of this project, but I believe that by the end of the decade we can have a positive picture.

However, it takes a lot of day-in-day-out operational improvement and the daily work that we have to invest, so this is also an opportunity for KGHM. We may improve our operational and managerial capacity. We can train our people and we can actually truly become a global player.

In terms of assets, we are a global player. We just need to improve our management processes to merge with the global position, and this is what we are doing. We have a lot of people with international expertise who also have a good grasp of human factor, because the human factor definitely impacts the performance.

So we've been working to optimize this project and there is no way back. And we are not going to decommission that; we are not going to step back from the international assets. We want to continue our international assets.

When it comes to our exposure to Sierra Gorda, obviously, we need to go through the cyclical evaluation of our international exposure, and this is what we are doing right now. But we and myself have reasons to believe that given the optimistic and conducive market situation that would bring a slightly better macro environment, well, we have reasons to believe that we should be able to improve performance during the next few years.

Well, it appears that we exhausted all the questions. Therefore, thank you for your attention, and we are looking forward to see you again when we are going to cover the results for Q1 2017.

Thank you.

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Editor [51]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.